Targeted Investments in Modernization and Gains in Productivity: Evidence from Firms in the Global Paper Industry
Georgia Institute of Technology; Center for Economic Studies and Ifo Institute for Economic Research (CESifo)
Georgia Institute of Technology
This paper examines the impact of targeted investments in modernization on productivity in a sample of firms in the global pulp and paper industry. This industry is important because it has traditionally accounted for significant amounts of employment and capital investment in North America and Europe. In contrast to much of the existing literature which focuses on the impact of R&D and patents on firms' performance and productivity, we examine data on actual investment transactions in four main areas of operations: (i) mechanical, (ii) chemicals, (iii) monitoring devices and (iv) information technology. We find that firms which made a greater number of investment transactions in modernization achieved higher productivity and these estimated quantitative effects are greater than the impact of standard innovation variables such as patents and R&D. Investment transactions in the information technology and digital monitoring devices impart a particularly noticeable boost to productivity. These results are obtained after controlling for other firm-specific variables such as capital-intensity and mergers and acquisitions. Two broad messages emerge from our study. First, targeted investments in modernization and various forms of incremental innovations appear to be critical for firms to achieve gains in productivity. While these may typically generate small gains on a year-to-year basis, they can compound to form meaningful differences in performance, productivity and competitive position across firms in the longer-run. Second, for some of the traditional industries like pulp and paper, R&D and patents seem to be particularly poor indicators of innovation and, more generally, how firms go about achieving gains in productivity. While this paper focuses on the pulp and paper industry, our broad framework and methodology is general and can be applied to understanding firms' strategies related to enhancing performance and productivity in a variety of industries.
Number of Pages in PDF File: 48
Keywords: Pulp and paper industry, investment, modernization, innovation, productivity, organizational behavior
JEL Classification: D20, L20, L60, M10
Date posted: March 7, 2007
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